A1 Refereed original research article in a scientific journal
Tick size and stock returns
Authors: Onnela Jukka-Pekka, Töyli Juuso, Kaski Kimmo
Publisher: North-Holland
Publication year: 2009
Journal: Physica A: Statistical Mechanics and its Applications
Journal name in source: PHYSICA A-STATISTICAL MECHANICS AND ITS APPLICATIONS
Journal acronym: PHYSICA A
Volume: 388
Issue: 4
First page : 441
Last page: 454
Number of pages: 14
ISSN: 0378-4371
DOI: https://doi.org/10.1016/j.physa.2008.10.014(external)
Abstract
Tick size is an important aspect of the micro-structural level organization of financial markets. It is the smallest institutionally allowed price increment, has a direct bearing on the bid-ask spread, influences the strategy of trading order placement in electronic markets, affects the price formation mechanism, and appears to be related to the long-term memory of volatility Clustering. In this paper we investigate the impact of tick size on stock returns. We start with a simple simulation to demonstrate how continuous returns become distorted after confining the price to a discrete grid governed by the tick size. We then move on to a novel experimental set-up that combines decimalization pilot programs and cross-listed stocks in New York and Toronto. This allows us to observe a set of stocks traded simultaneously under two different ticks while holding all security-specific characteristics fixed. We then study the normality of the return distributions and carry out fits to the chosen distribution models. Our empirical findings are somewhat mixed and in some cases appear to challenge the simulation results. (C) 2008 Elsevier B.V. All rights reserved.
Tick size is an important aspect of the micro-structural level organization of financial markets. It is the smallest institutionally allowed price increment, has a direct bearing on the bid-ask spread, influences the strategy of trading order placement in electronic markets, affects the price formation mechanism, and appears to be related to the long-term memory of volatility Clustering. In this paper we investigate the impact of tick size on stock returns. We start with a simple simulation to demonstrate how continuous returns become distorted after confining the price to a discrete grid governed by the tick size. We then move on to a novel experimental set-up that combines decimalization pilot programs and cross-listed stocks in New York and Toronto. This allows us to observe a set of stocks traded simultaneously under two different ticks while holding all security-specific characteristics fixed. We then study the normality of the return distributions and carry out fits to the chosen distribution models. Our empirical findings are somewhat mixed and in some cases appear to challenge the simulation results. (C) 2008 Elsevier B.V. All rights reserved.
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